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On January 18, 1961, just before leaving office, President Dwight D. Eisenhower gave a farewell address to the nation in which he called attention to the “conjunction of an immense military establishment and a large arms industry.” He warned that “in the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.”

As Eisenhower spoke, the military-industrial complex was celebrating its twentieth birthday. The vast economic and administrative apparatus for the creation and deployment of weapons took its enduring shape during the two years preceding the Japanese attack on Pearl Harbor. It grew to gargantuan proportions during the war, then survived and flourished during the four decades of the Cold War. By the 1950s, members of Congress had insinuated themselves into positions of power in the complex, so that one is well justified in calling it the military-industrial-congressional complex (MICC) during the past forty years.

The powerful role played by the MICC in the second half of the twentieth century testifies to a fact that Americans have seldom faced squarely: World War II did not end in a victory for the forces of freedom; to an equal or greater extent, the defeat of Nazi Germany and its allies represented a victory for the forces of totalitarian oppression in the Soviet Union and, later, its surrogates around the world. Hence, in 1945, Americans merely traded one set of aggressive enemies for another. In reality, the war did not end until the disintegration of the Soviet Union and the degeneration of its armed forces in the early 1990s. In America, the long war — from 1940 to 1990 — solidified the MICC as an integral part of the political economy.

Its antecedents hardly suggested how quickly and hugely the MICC would grow. Prewar military budgets were very small: during the fiscal years 1922-1939 they averaged just $744 million, roughly one percent of GNP. In those days, military purchases were transacted according to rigidly specified legal procedures. Normally, the military purchaser publicly advertised its demand for a definite quantity of a specific item, accepted sealed bids, and automatically awarded the contract to the lowest bidder.

Moreover, few businessmen wanted military business or any dealings with the New Deal government. When Fortune magazine surveyed business executives in October 1940, it found that seventy-seven percent had reservations about doing rearmament work because of their “belief that the present administration in Washington is strongly antibusiness and [their] consequent discouragement over the practicability of cooperation with this administration on rearmament.”

But conditions changed dramatically between mid-1940 and late 1941. During that period, Congress appropriated $36 billion for the War Department alone — more than the army and navy combined had spent during World War I. With congressional authorization, the War and Navy departments switched from using mainly sealed-bid contracts to mainly negotiated contracts, often providing that the contractor be paid his full costs, however much they might be, plus a fixed fee. Contracts could be changed to accommodate changes in the contractor’s circumstances or poor management in performing the work. In these and other ways, military contracting was rendered less risky and more rewarding. As Secretary of War Henry Stimson said at the time, “If you are going to try to go to war, or to prepare for war, in a capitalistic country, you have got to let business make money out of the process or business won’t work.”

Businessmen worked, to be sure, and they made money — far more than anyone had dreamed of making during the Depression. Much of the more than $300 billion the government spent for war goods and services ended up in the pockets of the contractors and their employees. According to a contemporary study, rates of return on net worth ranged from twenty-two percent for the largest companies to forty-nine percent for the smaller firms — extraordinary profits given that the contractors bore little or no risk.

Large manufacturing firms enjoyed the bulk of the business. The top one hundred prime contractors received about two-thirds of the awards by value; the top ten got about thirty percent; the leading contractor, General Motors, accounted for nearly eight percent. The military research and development contracts with private corporations were even more concentrated. The top sixty-eight corporations got two-thirds of the R&D awards; the top ten took in nearly two-fifths of the total.

The government itself became the dominant investor, providing more than $17 billion, or two-thirds of all investment, during the war. Besides bankrolling ammunition plants, the government built shipyards, steel and aluminum mills, chemical plants, and many other industrial facilities. Thanks to government investment and purchases, the infant aircraft industry soared to become the nation’s largest, building 297,000 aircraft by the war’s end. One might justifiably call this government investment “war socialism.”

But it had a peculiarly American twist that makes “war fascism” a more accurate description. Most of the government-financed plants were operated not directly by the government but by a relatively small group of contractors. Just twenty-six firms enjoyed the use of half the value of all governmentally financed industrial facilities leased to private contractors as of June 30, 1944. The top 168 contractors using such plants enjoyed the use of more than eighty-three percent of all such facilities by value. This concentration had important implications for the character of the postwar industrial structure because the operator of a government-owned, contractor-operated facility usually held an option to buy it after the war, and many contractors did exercise their options.

The arrangements created in 1940 and refined during the next five years completely transformed the relations between the government and its military contractors. In the words of Elberton Smith, the official army historian of the mobilization, the relationship “was gradually transformed from an ‘arms length’ relationship between two more or less equal parties in a business transaction into an undefined but intimate relationship.” The hostility that businessmen had felt toward the government in 1940 evolved into a keen appreciation of how much a company could gain by working hand-in-glove with the military.

During the Cold War these relationships became institutionalized. Between 1948 and 1989, the government spent more than $10 trillion (in dollars of today’s purchasing power) for national defense, and much of the money found its way into the bank accounts of the defense contractors, their employees, and their suppliers. The procurement business remained as it had become during the war — fluid and subject to mutually beneficial adjustment. Transactions were not so much firm deals as ongoing joint enterprises among colleagues and friends in which military officials and businessmen cooperated to achieve a common goal not incompatible with, but rather highly facilitative of, the pursuit of their separate interests.

Aside from the serenity that attends the spending of other people’s money, military-industrial dealings were smoothed by the personal passages back and forth across the border between the government and the contractors. People spoke of the “old boy network” and the “revolving door.” Upon retirement, thousands of military officers found immediate employment with the contractors, while industry officials routinely occupied high-ranking positions in the Pentagon bureaucracy during leaves from their firms. It was easy to forget who worked for whom. As General James P. Mullins, former commander of the Air Force Logistics Command, remarked, the defense business “is not business as usual among independent parties. This is a family affair among terribly interdependent parties.”

The families tended to do well. When Ruben Trevino and I made a study of the profitability of defense contracting (published in Defence Economics, 1992, pages 211-218), we found that during the period 1970-1989, the profit rates of the top fifty defense contractors substantially exceeded those of comparable nondefense companies. This conclusion holds regardless of whether profits are measured by the firms’ accounting rate of return on investment or assets or by the stock-market payoff to shareholders in the form of dividends and capital gains. We also found that investing in defense contractors was not significantly riskier than investing in comparable nondefense companies. In short, this business has been very good to those involved in it.

Even when companies got into trouble, they could expect to be bailed out. Lockheed, Litton, General Dynamics, Chrysler, Grumman, and other leading defense contractors demonstrated that the Pentagon’s propensity to protect its big prime contractors outweighed the inclination to hold them to the terms of their contracts. To subsidize the favored firms, the Department of Defense provided for subsidies to keep facilities open and to finance ongoing R&D, loans and loan guarantees, government-supplied plants and equipment, tax breaks, and strategic placement of new contracts.

Congress, as usual, went where the money was. Defense-related jobs served as a major determinant of congressional defense decisions for both liberals and conservatives. Members of Congress strove to steer contracts and subcontracts to favored constituents, who rewarded them in turn with lavish campaign contributions, votes, and other payoffs. Congressional micro-management of the defense program grew ever more elaborate as lawmakers grasped new opportunities to control the disposition of defense resources. Resistance to base closures, in particular, prompted the most exquisite legislative maneuvers. For more than a decade after 1977, the Pentagon found it impossible to close any large defense facility, no matter how obsolete or otherwise unwarranted. Weapons systems no longer desired by the military, such as A-7 and A-10 aircraft in the early 1980s, got extended funding, thanks to the efforts of friendly legislators.

This waste of money had many other pernicious consequences. With great corporations, powerful military authorities, and members of Congress all linked in a mutually self-serving complex, there was little incentive to end the Cold War. Not that anyone craved World War III. But wealth, position, power, and perquisites all rode on the shoulders of the MICC. The best of all worlds, then, was massive, ongoing preparation for war that would never occur. But with the nation well-prepared for war, national leaders launched more readily into military adventures like those in Korea and Vietnam, not to mention a variety of smaller projections of force abroad. Among the costs of the MICC, we might count the more than 112,000 American deaths sustained in the Cold War’s hot engagements.

In retrospect, we can see clearly that World War II spawned the MICC and that the war’s long continuation as the Cold War created the conditions in which the MICC could survive and prosper. America’s economy sacrificed much of its potential dynamism as the massive commitment of resources to military R&D diverted them from the civilian opportunities being pursued with great success in Japan, Germany, and elsewhere. For the period 1948-1989, national defense spending consumed, on average, 7.5 percent of American GNP. The costs to liberty were also great, as national defense authorities, using the FBI, CIA, and other agencies, violated people’s constitutional rights on a wide scale.

When we are tempted to look back at World War II as the “good war,” we would do well to consider the full range of its consequences.

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Robert Higgs is Senior Fellow in Political Economy for The Independent Institute and editor of The Independent Review: A Journal of Political Economy. Higgs is the author of eight books, the most recent of which are "Depression, War, and Cold War: Studies in Political Economy" (2006) and "Neither Liberty nor Safety: Fear, Ideology, and the Growth of Government" (2007). Of his five edited or co-edited books, the most recent are "Re-Thinking Green: Alternatives to Environmental Bureaucracy" (with Carl Close, 2005) and "The Challenge of Liberty: Classical Liberalism Today" (with Carl Close, 2006). A contributor to many scholarly volumes, he is also the author of more than 100 articles and reviews in the professional journals of economics, demography, history, and public policy. Higgs is also an adjunct scholar of the Ludwig von Mises Institute and Thomas F. Gleed professor of business at Seattle University.

Reading List

Prepared by Richard M. Ebeling

Austrian economics is a distinctive approach to the discipline of economics that analyzes market forces without ever losing sight of the logic of individual human action. Two of the major Austrian economists in the 20th century have been Friedrich A. Hayek, who won the Nobel Prize in Economics, and Ludwig von Mises. Posted below is an Austrian Economics reading list prepared by Richard M. Ebeling, economics professor at Northwood University in Midland and former president of the Foundation for Economic Education and vice president of academic affairs at FFF.